Over the last few years there’s been a trend towards wider use of trust protectors in domestic trusts (see here for why), and last year’s 4th DCA opinion in the Minassian case (which I wrote about here) may go a long way towards accelerating that trend — especially in Florida.
As trust-protector clauses get incorporated into more and more trust agreements, sooner or later we’ll have to figure out what do when one of these trust protectors goes off the rails. So here’s the kind of question we need to start thinking about. If a trust protector acts in a way that’s incompetent, vindictive or self-serving, and the trust’s beneficiaries suffer economic loss due to those actions, can you sue him? For now, the best we can say is “maybe.” It all depends on whether or not the trust protector is considered a fiduciary. And yes, that’s an open question.
When is a trust proctor a fiduciary?
The term “trust protector” is a marketing tool, it’s not actually found in our Trust Code. As explained by the 4th DCA in the Minassian case, the authority for the type of role usually filled by a trust protector is found in section 736.0808 of our Trust Code (powers to direct), which was adopted from section 808 of the Uniform Trust Code. Under F.S. 736.0808(4), a person — other than a beneficiary — who holds a power to direct is presumptively a fiduciary. If a beneficiary’s also a trustee, he’s not exempted from any of the duties usually applicable to any other trustee. So why the different standard for trust protectors? Prof. Ausness asks this same questions in a 2014 article entitled When is a Trust Protector a Fiduciary?
The comment to section 808 of the UTC suggests that this exemption is primarily applicable to self-directed accounts such as employee benefit plans and individual retirement accounts. Clearly, there is no need to impose a fiduciary duty in a case where the sole beneficiary of a trust has the power to direct how the trust assets are invested or distributed. On the other hand, if a trust protector is only one of several beneficiaries, it seems that he should be subject to minimal fiduciary duties just as a trustee or trust advisor would be who was also one of the trust beneficiaries.
In considering whether the protector is a fiduciary, this question may be best answered by asking another question: what was the settlor’s intent and purpose in naming the protector and granting the specific powers? If the answer is to give the protector the enforceable power to carry out certain objectives consistent with and in furtherance of the settlor’s intent and the purposes of the trust, then one must conclude that the settlor expected that person to use his best judgment and exercise the powers in “good faith with regard to the purposes of the trust and the interests of the beneficiaries.” On the other hand, if the answer is clearly no, that the settlor intended the power(s) to be exercised at the sole personal discretion of the protector without regard to the settlor’s intent, the interests of the beneficiaries, or the purposes of the trust, then the power will be a personal one.
[S]ay the protector is granted the typical power to remove and replace the trustee, but the power is to be non-fiduciary (assuming that is possible). Would you feel comfortable stating the following in the relevant trust provision?It is the settlor’s intention that in exercising this power the protector shall not be deemed a fiduciary, shall not be required to monitor the trustee’s performance, and shall not be bound by or required to consider any particular standards of trustee performance. He shall not be required to act upon notice that a trustee is in breach if its fiduciary duty, and in the event of appointment of a successor trustee, the protector shall not be required to consider whether any such successor trustee has any experience in or knowledge of trust administration, or is a suitable person or entity to act as trustee. The protector may exercise or refrain from exercising such power in a capricious or whimsical manner at his total personal discretion, without liability therefor.Note that the forgoing provision is quite consistent with the legal basis of personal powers. Contrast this with the case, again, where the settlor wants to limit the protector’s liability, but in this case does not want to place the trust and the beneficiaries at unreasonable and unnecessary risk. In such a situation, we (and the settlor) might feel more comfortable with something like this:It is in the settlor’s intention that in exercising this power the protector shall consider and review on a periodic basis all relevant circumstances, including the trustee’s performance in light of the purposes of the trust and the needs of the beneficiaries, and shall use his best judgment in maintaining a qualified, suitable person or entity to serve as trustee hereof. The protector serving hereunder shall not be liable for any action or inaction except where there is found to be fraud, recklessness or willful misconduct.I readily acknowledge that the proposed language in the first illustration may appear extreme, but isn’t that what we intend when we make the power personal and attempt to totally exculpate the protector from liability. Unfortunately, we simply can’t have it both ways, so that a protector who removes or replaces a trustee, for instance, with a totally unsuitable successor who proceeds to waste trust assets, has no liability for the loss.